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Collaborations and reinvention are common in the development of intellectual property. Consider the music industry as a familiar example: some artists will team up to create super-groups and special albums and some artists perform the songs of others as a reinterpretation or cover. A similar phenomenon occurs in drug development as the same active ingredient is reformulated with different additives or made available through new delivery methods.

Pain Therapeutics (PTIE) is partnered with King Pharmaceuticals, a subsidiary of Pfizer (PFE), in the hopes of commercializing an oxycodone-based treatment called Remoxy®. Pfizer has publicly announced its intentions to re-file a NDA (New Drug Application) for Remoxy after earlier Phase 3 clinical trials were found wanting for variable oxycodone release.

If Remoxy successfully completes the FDA approval process it would join the ranks of many other oxycodone-based pain management therapies. The success of REMOXY will depend on its ability to differentiate itself as a superior or better-known treatment relative to competitors.

Even if Remoxy becomes a blockbuster painkiller, investors may be better served by purchasing shares of its development partners. Pfizer and DURECT (DRRX) each stand to receive portions of REMOXY sales. In addition, a better investment opportunity can be made in Pfizer's other oxycodone collaboration which is expected to post sales in 2013.

Painkillers can change lives for the better and enable the afflicted to continue many daily activities that would have been impossible while enduring chronic pain. Unfortunately, this Godsend sometimes leads to addiction. Worse yet, some people intentionally abuse these drugs recreationally.

Historically, natural opioids like morphine, codeine and heroine have been used as painkillers and recreational drugs. Synthetic and semi-synthetic opioids like oxycodone have been developed in attempts to divorce the medical and nonmedical opioid use. These attempts have met with mixed success.

OxyCotin®, a hydrochloride salt of oxycodone, has become the poster-child of painkiller addiction. Purdue Pharma successfully won FDA approval for this painkiller in 1995 and OxyCotin was sold in the U.S. market by 1996. Illicit use was suspected by 2001, which prompted Purdue Pharma to discontinue the sale of its 160 mg high-dose pills. Years later, the company and three of its executives paid $634 million in fines for felony misbranding. These parties had misrepresented that OxyCotin was as safe as Tylenol or Aspirin in their advertising.

Today, there are many oxycodone-based painkillers in the market and in development. Idealistically, the value of a new treatment is derived from a lower incidence of addiction or abuse. A more worldly view would recognize that any new patented treatment, even if it does not represent a meaningful improvement, allows for the branding and marketing of a new product with protection from generic drug competition. Today, Purdue Pharma still controls the OxyCotin brand and its products are distributed by Watson Pharmaceuticals (WPI). Endo Health Solutions (ENDP) currently offers oxycodone/acetaminophen pills under the Percocet brand. Acura Pharmaceuticals (ACUR) has recently won FDA approval for its Oxecta® oxycodone treatment and anticipates sales in 2013.

Dissecting the Remoxy Partnership

In 2002, DURECT granted an exclusive license to Pain Therapeutics to develop and commercialize Remoxy and other opioid products using its ORADUR technology as a delivery platform. Pain Therapeutics paid DURECT $1 million up front and $1.7 million of $9.3 million total milestone-based payments. Later, King Pharmaceuticals bought into this development responsibility. King was later acquired by Pfizer. King/Pfizer have paid DURECT $7.4 million in milestone payments cumulatively. (2012 2Q 10-Q, p. 9-10).

These payments are small compared to the possible royalties and contractual margins which are possible from the sale of Remoxy and other opioids. DURECT will receive 6.0% to 11.5% of any net sales, a royalty that is based on sales volume. DURECT has also negotiated the exclusive rights to sell Pfizer excipients at cost plus a "specified percentage mark-up" margin. (An excipient is an inactive ingredient in a drug product which often tunes its release or absorption.) Since its revenues from supplying these excipients were $51,000 in the second quarter and the associated costs of goods sold were $33,000, it appears that this fixed gross profit margin is 35%. (2012 2Q 10-Q, p. 9-10)

If it can commercialize the drug, Pain Therapeutics would receive more royalties than DURECT. For net sales in the United States, Pfizer's royalty rate for REMOXY and other abuse-resistant candidates is 15% for the first $1.0 billion and 20% thereafter. The royalty rate for net sales outside the United States is 10%. (2012 2Q 10-Q, p. 16)

Prior to FDA approval and sales, Pain Therapeutics must pay for ongoing research efforts and must make milestone payments to DURECT. All in all, DURECT seems to have a better position in this deal than Pain Therapeutics. It has locked in a royalty rate without having to endure the substantial research expenses that await Pain Therapeutics.

Another similar development deal was struck between Pfizer/King and Acura Pharmaceuticals for the development of Oxecta. Commencing in February 2013 Acura will receive 5% to 25% of net sales of Oxecta based on its agreement with Pfizer. (2012 2Q 10-Q p. 14)

Market Capitalizations

DURECT and Acura Pharmaceuticals are trading at more reasonable market capitalizations than Pain Therapeutics:

Ticker

Company

Market Cap ($ Millions)

Min Royalty

Max Royalty

Payback Net Sales (Max)

ACUR

Acura Pharmaceuticals

72.92

5%

25%

$1.458 Billion

PTIE

Pain Therapeutics

240.52

15%

20%

$1.603 Billion

DRRX

DURECT

138.5

6%

11.5%

$2.308 Billion

PFE

Pfizer

190994.6

NA

NA

NA

At minimum royalty rates, it would take slightly less net drug sales for Acura Pharmaceuticals to receive revenues equal to its current market capitalization that would be the case for Pain Therapeutics. This means that ACUR shares are more reasonably priced in terms of low potential revenues. Moreover, Acura Pharmaceuticals also has a higher maximum royalty, which could afford more upside. It should also be noted that Acura's lower valuation is particularly interesting, since its Oxecta product will be ready for sale in 2013, while Pain Therapeutics currently requires more testing prior to Remoxy approval. Acura's shares also provide exposure to a wider array of development projects outside of opioid delivery.

Like Acura Pharmaceuticals, DURECT is a better alternative to Pain Therapeutics because of its diversified development products. Moreover, it is less exposed to potential expensive complications in the drug development process.

Source: Pain Therapeutics - Another Oxycodone Remix